Democrats' House Takeover May Have Limited Effect on Defense Sector

As Democrats are projected to have taken control of the House of Representatives in Tuesday's elections, they may seek to cut federal spending as a means of trimming the ballooning deficit and the $21 trillion national debt, and that may affect the outlook for the aerospace and defense industry, which has been bolstered by an increased defense budget thus far under the Trump Administration. But the effect may be limited.

With election night ending in solid projections the Democrats will take the House, and the Republican majority was retained in the Senate, a split Congress will be forced to compromise on the federal budget.

"Current law requires a spending cut in the fiscal year 2020 (fiscal years begin in October, and FY20 begins October 2019)," Societe Generale analysts wrote in a Nov. 5 research note. "Democrats will want to avoid painful cuts to non-defense programs. It might not be easy, but there is plenty of room to negotiate a bipartisan outcome."

While the 2019 and 2020 defense budgets are largely set -- with $716 billion approved for 2019 and $700 billion requested for 2020 -- the budgets beyond those years are in question.

"We know the current backdrop and planned budgets are in defense's favor, however, the expectation amongst investors has been for the Democrats to take control of the House, and thus, curb spending," Jim Cramer wrote to Action Alerts PLUS members before the election. "That said, we believe this outcome has largely been priced in based on the poor action in the group, and therefore believe the downside to be limited in the event of a Democratic victory."

"As a result, we continue to like the risk/reward profiles in Honeywell (HON) , Raytheon (RTN) and Textron (TXT) ," Cramer and the AAP team said. "And while Honeywell is often first of mind when it comes to defense, we remind members of how its recent portfolio actions, the spinoffs of Garrett Motion Inc. (GTX) and Resideo Technologies (REZI) , have resulted in defense representing about 13% of the new Honeywell's end-market sales."

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